TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 22

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HXK 100/7

DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBLIC USE

EBD/83/264

October 18, 1983

HKK 100/7.

(91)

Sen GED Esid T. Holloway

To:

Members of the Executive Board

From:

The Secretary

Subject:

Hong Kong - Exchange System

ct

KTM.

The Secretary has received the following memorandum dated October 17, 1983 from Mr. Wicks:

I have been asked by my authorities to draw to the Board's attention the following statement, issued at noon on Saturday, October 15, 1983 by the Financial Secretary to the Government of Hong Kong.

I want to tell you about two steps which the government is taking now to stabilise the exchange rate of the Hong Kong dollar.

For 37 years

First, let me give you some background. from 1935 to July 1972 the Hong Kong dollar was pegged to sterling. In those days the sterling area existed and for most of that period the international monetary system was characterised by fixed exchange rates. From 1972 to November 1974 the Hong Kong dollar was pegged to the U.S. dollar. Since 1974 Hong Kong in common with other major market economies has had a freely floating exchange rate. This floating system has served us well. It has given us a measure of insulation from the ups and downs of other economies, and under it Hong Kong has recorded very high rates of economic growth. Living standards have risen accordingly.

Towards the end of last year the exchange rate started markedly to weaken, reflecting amongst other factors uncer- tainties about Hong Kong's future.

Before the government announced three weeks ago that it was considering proposals to stabilise the exchange rate, currency depreciation was tending increasingly to feed on itself in an unstable and irrational manner. This depreciation was not justified by either current economic developments or future prospects. The economy has rebounded and is doing

very well.

There is little unemployment and exports are booming. Hong Kong has substantial foreign curency reserves, a generally liquid banking system and virtually no government debt.